October 28, 2018

Missing the best or worst market days

This morning I saw the chart on Ritholz.com of what happens when you miss the best X days of the market. I see a variation of this chart often and is used to argue why someone should not try and time the market. One concept I like to do is to invert. Meaning try the opposite idea and see what you get. What I rarely see is the chart if you missed the worst X days. Given it is a rainy Sunday morning here in Seattle and I had nothing better to do, I wanted to see that chart.

The Test

The chart shown was through 2016. I used SP 500 Total Return index data from 1/1/1996 to 9/30/2018. Entry and exit are done at the close. For example, if tomorrow will be a best day, then the test exits at today’s close and enter on the next day’s close.

The argument for why you should not try and time the market

Here is what happens when you miss the best days.

As expected the returns get worse and worse as you miss more days. Missing good days is bad.

 

The argument for why you should try and time the market

Here is what happens when you miss the worst days.

Again, as expected the returns improve. But notice home much they improve. Fully invested CAR is 9.08% vs missing the worst 60 with a CAR of 23.53%.

 

What about maximum drawdown?

What happens to the drawdown as you miss those worst days?

MDD goes from 55.25% to 31.89%.

Spreadsheet

File the form below to get the spreadsheet with lots of additional information. This includes top drawdowns, trade statistics and more.

Final Thoughts

At the end of the day both ideas should be dropped. They show you the obvious. You would be crazy to try and time the market on a day by day basis. These best and worst days also tend to bunch up, which makes it even harder.

Backtesting platform used: AmiBroker. Data provider: Norgate Data (referral link)

Good quant trading,

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Emlyn Flint - October 29, 2018 Reply

“These best and worst days also tend to bunch up, which makes it even harder.”

Your initial observation is the crux! I would suggest re-running your test but missing both best and worst X days. You may well be surprised by the result.

And once you couple those numbers with your observation above, I think you may have a very different conclusion.

Emlyn

    Cesar Alvarez - October 29, 2018 Reply

    That it is an interesting idea.

Tyler D Harris - October 31, 2018 Reply

Everyone needs to read Meb Faber’s paper on this subject titled “Where the Black Swans Hide and the Ten Best Days Myth.”

https://mebfaber.com/2011/08/12/where-the-black-swans-hide-and-the-ten-best-days-myth/

Once you realize the best (and worst) days occur when the market is most volatile and that the market is most volatile when it is going down, you start to wonder if you really want to be in the market on those days. It isn’t difficult at all (as Meb and many others have shown) to construct a quant investing strategy that avoids those days altogether and outperforms the market while doing so.

    Cesar Alvarez - October 31, 2018 Reply

    Yes, using a simple MA200 day filter on the market generally lets you avoid these days.

vtrender - November 10, 2018 Reply

It isn’t difficult at all (as Meb and many others have shown) to construct a quant investing strategy

    Cesar Alvarez - November 10, 2018 Reply

    What I meant by difficult is trying to time it down to the individual days. Using a simple MA200 works fine for market timing.

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